Lloyds TSB Needs to Treat Its Achilles Heel; BREAKING VIEWS

Lloyds TSB Needs to Treat Its Achilles Heel; BREAKING VIEWS

Article excerpt

LLOYDS TSB may have given up trying to be a growth stock some time ago, but it has in recent years attracted a following because of big dividends. The group's shares yield a juicy 5.5%.

But Lloyds is no longer the profit machine it once was.

Indeed, the group may find it a sweat even to maintain its existing dividend.

The group's Achilles heel is its big life insurance operation, which is exposed to equity market valuations through its investment portfolio. This has been battered as markets have slumped.

When share prices fall, insurers should set aside capital to cover future benefits to policyholders. The worry is that in a prolonged bear market Lloyds' life business could devour significant chunks of its balance sheet reserves. It is not as if Lloyds has so much surplus capital it can afford to take the risk.

Its capital ratios are no more than adequate, and it is not augmenting them fast. Last year it earned [pound]2.6 billion after tax and negative investment-return. It paid dividends of nearly [pound]2 billion - skimpy cover of about 1.3 times.

Banks can only grow their businesses if they retain capital. And if Lloyds continues paying bigger dividends off a depressed profit base its revenues will stagnate. Perhaps this is something for new finance director Philip Hampton, to ponder. He has just been through a balance sheet crisis at British Telecom. That has probably taught him the virtue of conservative financing. He should cut Lloyds' payout.

Jonathan Ford

HOW hard are investment banks wielding the axe on their hapless employees?

The Thomson Extel Survey, an annual rating of analysts, may provide a clue.

The survey itself is growing in scope, so it should not be seen as a scientific guide to employment trends. That said, a study of two hard-hit sectors is still revealing. There are 412 European banking analysts - a fall of only 2% over the year, despite a 7% decline in bank stock prices. …